An operating agreement is a customized document that outlines the required terms and conditions according to which a company functions in a structured manner. Although it is not a mandatory requirement for setting up a company in most states, it is binding if signed and usually used when creating a Limited Liability Company (L.L.C.).
If set in place, it becomes the internal operating rules to which the members adhere, and in its absence, the latter will refer to the governing laws in the state they have registered their company.
When it exists, it is a document incorporating the main guidelines and rules according to which the company will function. It is encouraged to have an operating agreement as it protects the status of the company, can be used when conflicts arise and maintains a uniform approach to the way business is carried out.
If it is not in place, then the company is bound by the legal requirement provided in the country of incorporation, which may be too general or vague to apply to the specific situation and would lead to more uncertainty.
The main areas covered are usually:
- Membership and repartition of shares, usually under the form of a percentage;
- Setting up a place of business and the conditions for opening other offices or headquarters;
- Business purpose and scope;
- The members’ responsibilities and voting rights;
- Duties and powers of members;
- The profit and loss allocation between members;
- The rules related to meetings and taking votes, quorum to hold meetings and deadlines to implementing decisions, taking minutes during meetings and setting up an agenda, recording and archiving;
- The issues related to the management of the company, if there is a board of directors or supervision committee;
- The conditions under which a member may withdraw, and the way in which the member’s economic interest is calculated at the time of withdrawal;
- The possibility for a member to sell or cession his/her shares to a another member or a third party;
- The impact of the death or disability of a member;
- The conditions under which new members may be admitted;
- The conditions under which the company may be liquidated, and the priority given to claims between the members at liquidation;
- Entry into and termination dates;
- Management fees;
- Governing laws and arbitration if necessary.
If an operating agreement is set in place, it must be archived and is binding to existing and future members of the company. It may be changed only in the conditions set up in the initial operating agreement.